10-Q 1 acn-20160229x10q.htm 10-Q 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED February 29, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM             TO   
Commission File Number: 001-34448
Accenture plc
(Exact name of registrant as specified in its charter)
 
Ireland
98-0627530
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1 Grand Canal Square,
Grand Canal Harbour,
Dublin 2, Ireland
(Address of principal executive offices)
(353) (1) 646-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of the registrant’s Class A ordinary shares, par value $0.0000225 per share, outstanding as of March 10, 2016 was 812,912,937 (which number includes 189,121,929 issued shares held by the registrant). The number of shares of the registrant’s Class X ordinary shares, par value $0.0000225 per share, outstanding as of March 10, 2016 was 22,820,040.



ACCENTURE PLC
INDEX
 
 
 
Page

2


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCENTURE PLC
CONSOLIDATED BALANCE SHEETS
February 29, 2016 and August 31, 2015
(In thousands of U.S. dollars, except share and per share amounts)
 
February 29,
2016
 
August 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
3,034,659

 
$
4,360,766

Short-term investments
2,820

 
2,448

Receivables from clients, net
3,986,141

 
3,840,920

Unbilled services, net
2,020,413

 
1,884,504

Deferred income taxes, net
868,631

 
879,320

Other current assets
766,136

 
611,436

Total current assets
10,678,800

 
11,579,394

NON-CURRENT ASSETS:
 
 
 
Unbilled services, net
55,945

 
15,501

Investments
61,037

 
45,027

Property and equipment, net
856,403

 
801,884

Goodwill
3,501,419

 
2,929,833

Deferred contract costs
679,135

 
655,482

Deferred income taxes, net
1,255,400

 
1,274,019

Other non-current assets
1,059,639

 
964,918

Total non-current assets
7,468,978

 
6,686,664

TOTAL ASSETS
$
18,147,778

 
$
18,266,058

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt and bank borrowings
$
1,784

 
$
1,848

Accounts payable
1,103,343

 
1,151,464

Deferred revenues
2,328,485

 
2,251,617

Accrued payroll and related benefits
2,970,823

 
3,687,468

Accrued consumption taxes
323,846

 
319,350

Income taxes payable
304,883

 
516,827

Deferred income taxes, net
43,722

 
41,193

Other accrued liabilities
496,293

 
562,432

Total current liabilities
7,573,179

 
8,532,199

NON-CURRENT LIABILITIES:
 
 
 
Long-term debt
26,866

 
25,587

Deferred revenues
730,127

 
524,455

Retirement obligation
1,118,278

 
1,108,623

Deferred income taxes, net
121,879

 
113,590

Income taxes payable
871,213

 
996,077

Other non-current liabilities
332,720

 
317,956

Total non-current liabilities
3,201,083

 
3,086,288

COMMITMENTS AND CONTINGENCIES

 

SHAREHOLDERS’ EQUITY:
 
 
 
Ordinary shares, par value 1.00 euros per share, 40,000 shares authorized and issued as of February 29, 2016 and August 31, 2015
57

 
57

Class A ordinary shares, par value $0.0000225 per share, 20,000,000,000 shares authorized, 812,702,851 and 804,757,785 shares issued as of February 29, 2016 and August 31, 2015, respectively
18

 
18

Class X ordinary shares, par value $0.0000225 per share, 1,000,000,000 shares authorized, 22,820,040 and 23,335,142 shares issued and outstanding as of February 29, 2016 and August 31, 2015, respectively
1

 
1

Restricted share units
878,172

 
1,031,203

Additional paid-in capital
5,329,852

 
4,516,810

Treasury shares, at cost: Ordinary, 40,000 shares as of February 29, 2016 and August 31, 2015; Class A ordinary, 188,844,667 and 178,056,462 shares as of February 29, 2016 and August 31, 2015, respectively
(12,790,718
)
 
(11,472,400
)
Retained earnings
14,915,912

 
13,470,008

Accumulated other comprehensive loss
(1,521,633
)
 
(1,411,972
)
Total Accenture plc shareholders’ equity
6,811,661

 
6,133,725

Noncontrolling interests
561,855

 
513,846

Total shareholders’ equity
7,373,516

 
6,647,571

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
18,147,778

 
$
18,266,058

The accompanying Notes are an integral part of these Consolidated Financial Statements.

3


ACCENTURE PLC
CONSOLIDATED INCOME STATEMENTS
For the Three and Six Months Ended February 29, 2016 and February 28, 2015
(In thousands of U.S. dollars, except share and per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
REVENUES:
 
 
 
 
 
 
 
Revenues before reimbursements (“Net revenues”)
$
7,945,565

 
$
7,493,329

 
$
15,958,728

 
$
15,389,044

Reimbursements
451,488

 
438,261

 
904,309

 
885,803

Revenues
8,397,053

 
7,931,590

 
16,863,037

 
16,274,847

OPERATING EXPENSES:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Cost of services before reimbursable expenses
5,575,749

 
5,252,690

 
11,026,393

 
10,609,115

Reimbursable expenses
451,488

 
438,261

 
904,309

 
885,803

Cost of services
6,027,237

 
5,690,951

 
11,930,702

 
11,494,918

Sales and marketing
830,332

 
798,644

 
1,706,125

 
1,706,218

General and administrative costs
451,440

 
420,962

 
916,906

 
864,969

Total operating expenses
7,309,009

 
6,910,557

 
14,553,733

 
14,066,105

OPERATING INCOME
1,088,044

 
1,021,033

 
2,309,304

 
2,208,742

Interest income
6,727

 
9,340

 
13,853

 
19,439

Interest expense
(4,543
)
 
(3,905
)
 
(8,595
)
 
(6,716
)
Other expense, net
(21,213
)
 
(21,508
)
 
(17,184
)
 
(24,487
)
Gain on sale of business
553,577

 

 
553,577

 

INCOME BEFORE INCOME TAXES
1,622,592

 
1,004,960

 
2,850,955

 
2,196,978

Provision for income taxes
222,734

 
261,768

 
582,416

 
561,544

NET INCOME
1,399,858

 
743,192

 
2,268,539

 
1,635,434

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc.
(63,379
)
 
(41,053
)
 
(102,955
)
 
(91,689
)
Net income attributable to noncontrolling interests – other
(9,959
)
 
(11,413
)
 
(20,165
)
 
(21,489
)
NET INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
1,326,520

 
$
690,726

 
$
2,145,419

 
$
1,522,256

Weighted average Class A ordinary shares:
 
 
 
 
 
 
 
Basic
626,523,793

 
628,254,759

 
626,505,960

 
628,338,365

Diluted
668,125,087

 
679,165,137

 
669,758,590

 
680,752,956

Earnings per Class A ordinary share:
 
 
 
 
 
 
 
Basic
$
2.12

 
$
1.10

 
$
3.42

 
$
2.42

Diluted
$
2.08

 
$
1.08

 
$
3.36

 
$
2.37

Cash dividends per share
$

 
$

 
$
1.10

 
$
1.02

The accompanying Notes are an integral part of these Consolidated Financial Statements.

4


ACCENTURE PLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three and Six Months Ended February 29, 2016 and February 28, 2015
(In thousands of U.S. dollars)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
NET INCOME
$
1,399,858

 
$
743,192

 
$
2,268,539

 
$
1,635,434

OTHER COMPREHENSIVE LOSS, NET OF TAX:
 
 
 
 
 
 
 
Foreign currency translation
(24,632
)
 
(152,849
)
 
(139,011
)
 
(343,000
)
Defined benefit plans
3,545

 
4,287

 
7,646

 
8,129

Cash flow hedges
(10,975
)
 
56,381

 
21,802

 
73,929

Marketable securities
(98
)
 

 
(98
)
 

OTHER COMPREHENSIVE LOSS ATTRIBUTABLE TO ACCENTURE PLC
(32,160
)
 
(92,181
)
 
(109,661
)
 
(260,942
)
Other comprehensive income (loss) attributable to noncontrolling interests
(2,077
)
 
4,230

 
(767
)
 
9,379

COMPREHENSIVE INCOME
$
1,365,621

 
$
655,241

 
$
2,158,111

 
$
1,383,871




 


 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO ACCENTURE PLC
$
1,294,360

 
$
598,545

 
$
2,035,758

 
$
1,261,314

Comprehensive income attributable to noncontrolling interests
71,261

 
56,696

 
122,353

 
122,557

COMPREHENSIVE INCOME
$
1,365,621

 
$
655,241

 
$
2,158,111

 
$
1,383,871

 The accompanying Notes are an integral part of these Consolidated Financial Statements.


5


ACCENTURE PLC
CONSOLIDATED SHAREHOLDERS’ EQUITY STATEMENT
For the Six Months Ended February 29, 2016
(In thousands of U.S. dollars and share amounts)
(Unaudited)
 
Ordinary
Shares
 
Class A
Ordinary
Shares
 
Class X
Ordinary
Shares
 
Restricted
Share
Units
 
Additional
Paid-in
Capital
 
Treasury Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Accenture plc
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
$
 
No.
Shares
 
$
 
No.
Shares
 
$
 
No.
Shares
 
 
 
$
 
No.
Shares
 
 
 
 
 
Balance as of August 31, 2015
$
57

 
40

 
$
18

 
804,758

 
$
1

 
23,335

 
$
1,031,203

 
$
4,516,810

 
$
(11,472,400
)
 
(178,096
)
 
$
13,470,008

 
$
(1,411,972
)
 
$
6,133,725

 
$
513,846

 
$
6,647,571

Net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2,145,419

 
 
 
2,145,419

 
123,120

 
2,268,539

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(109,661
)
 
(109,661
)
 
(767
)
 
(110,428
)
Income tax benefit on share-based compensation plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
109,926

 
 
 
 
 
 
 
 
 
109,926

 
 
 
109,926

Purchases of Class A ordinary shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
60,597

 
(1,464,099
)
 
(14,441
)
 
 
 
 
 
(1,403,502
)
 
(60,598
)
 
(1,464,100
)
Share-based compensation expense
 
 
 
 
 
 
 
 
 
 
 
 
333,495

 
24,220

 
 
 
 
 
 
 
 
 
357,715

 
 
 
357,715

Purchases/redemptions of Accenture Holdings plc ordinary shares, Accenture Canada Holdings Inc. exchangeable shares and Class X ordinary shares
 
 
 
 
 
 
 
 
 
 
(515
)
 
 
 
(21,009
)
 
 
 
 
 
 
 
 
 
(21,009
)
 
(1,652
)
 
(22,661
)
Issuances of Class A ordinary shares:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Employee share programs
 
 
 
 
 
 
7,565

 
 
 
 
 
(509,715
)
 
654,655

 
145,781

 
3,652

 
 
 
 
 
290,721

 
12,446

 
303,167

Upon redemption of Accenture Holdings plc ordinary shares
 
 
 
 
 
 
380

 
 
 
 
 
 
 
1,806

 
 
 
 
 
 
 
 
 
1,806

 
(1,806
)
 

Dividends
 
 
 
 
 
 
 
 
 
 
 
 
23,189

 
 
 
 
 
 
 
(704,580
)
 
 
 
(681,391
)
 
(39,285
)
 
(720,676
)
Other, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(17,153
)
 
 
 
 
 
5,065

 
 
 
(12,088
)
 
16,551

 
4,463

Balance as of February 29, 2016
$
57

 
40

 
$
18

 
812,703

 
$
1

 
22,820

 
$
878,172

 
$
5,329,852

 
$
(12,790,718
)
 
(188,885
)
 
$
14,915,912

 
$
(1,521,633
)
 
$
6,811,661

 
$
561,855

 
$
7,373,516

The accompanying Notes are an integral part of these Consolidated Financial Statements.


6


ACCENTURE PLC
CONSOLIDATED CASH FLOWS STATEMENTS
For the Six Months Ended February 29, 2016 and February 28, 2015
(In thousands of U.S. dollars)
(Unaudited)
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,268,539

 
$
1,635,434

Adjustments to reconcile Net income to Net cash provided by operating activities —
 
 
 
Depreciation, amortization and asset impairments
354,627

 
318,755

Share-based compensation expense
357,715

 
336,115

Gain on sale of business
(553,577
)
 

Deferred income taxes, net
(62,810
)
 
(4,080
)
Other, net
(52,964
)
 
(182,509
)
Change in assets and liabilities, net of acquisitions —
 
 
 
Receivables from clients, net
(172,884
)
 
(54,725
)
Unbilled services, current and non-current, net
(155,667
)
 
(156,320
)
Other current and non-current assets
(383,309
)
 
(389,521
)
Accounts payable
(75,286
)
 
(39,147
)
Deferred revenues, current and non-current
329,608

 
243,718

Accrued payroll and related benefits
(641,903
)
 
(192,803
)
Income taxes payable, current and non-current
(263,513
)
 
(249,455
)
Other current and non-current liabilities
(19,925
)
 
(91,275
)
Net cash provided by operating activities
928,651

 
1,174,187

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of property and equipment
1,539

 
1,941

Purchases of property and equipment
(242,845
)
 
(133,426
)
Purchases of businesses and investments, net of cash acquired
(747,637
)
 
(119,462
)
Proceeds from the sale of business, net of cash transferred
618,310

 

Net cash used in investing activities
(370,633
)
 
(250,947
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of ordinary shares
303,167

 
309,187

Purchases of shares
(1,486,761
)
 
(1,270,798
)
Proceeds from long-term debt, net
378

 
268

Cash dividends paid
(720,676
)
 
(678,736
)
Excess tax benefits from share-based payment arrangements
78,801

 
64,892

Other, net
(12,313
)
 
(16,092
)
Net cash used in financing activities
(1,837,404
)
 
(1,591,279
)
Effect of exchange rate changes on cash and cash equivalents
(46,721
)
 
(191,866
)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,326,107
)
 
(859,905
)
CASH AND CASH EQUIVALENTS, beginning of period
4,360,766

 
4,921,305

CASH AND CASH EQUIVALENTS, end of period
$
3,034,659

 
$
4,061,400

The accompanying Notes are an integral part of these Consolidated Financial Statements.

7

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)



1. BASIS OF PRESENTATION
The accompanying unaudited interim Consolidated Financial Statements of Accenture plc and its controlled subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These Consolidated Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended August 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on October 30, 2015.
The accompanying unaudited interim Consolidated Financial Statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. The Consolidated Financial Statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of results for these interim periods. The results of operations for the three and six months ended February 29, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2016.
Allowances for Client Receivables and Unbilled Services
As of February 29, 2016 and August 31, 2015, total allowances recorded for client receivables and unbilled services were $71,068 and $70,165, respectively.
Accumulated Depreciation
As of February 29, 2016 and August 31, 2015, total accumulated depreciation was $1,693,320 and $1,648,968, respectively.
Income Taxes
The Company applies an estimated annual effective tax rate to its year-to-date operating results to determine the interim provision for income tax expense. In addition, the Company recognizes taxes related to unusual or infrequent items or resulting from a change in judgment regarding a position taken in a prior year as discrete items in the interim period in which the event occurs.
The Company’s effective tax rates for the three months ended February 29, 2016 and February 28, 2015 were 13.7% and 26.0%, respectively. The Company’s effective tax rates for the six months ended February 29, 2016 and February 28, 2015 were 20.4% and 25.6%, respectively. Absent the gain from the Navitaire divestiture and related tax impact recorded during the three months ended February 29, 2016 (see Note 4 (Business Combinations and Divestiture) to these Consolidated Financial Statements), the effective tax rates would have been 15.4% and 22.8% for the three and six months ended February 29, 2016, respectively. During the three and six months ended February 29, 2016, the Company recorded benefits related to final determination of U.S. Federal taxes for fiscal 2012 of $99,212 and benefits related to changes in the geographic distribution of earnings. During the three and six months ended February 28, 2015, the Company recorded benefits related to final determination of U.S. Federal taxes for fiscal years 2010 and 2011 of $169,829. This was offset by expenses of $171,276 associated with an increase in deferred tax liabilities during the three months ended February 28, 2015 when the Company concluded that certain undistributed earnings of its U.S. subsidiaries would no longer be considered permanently reinvested.
New Accounting Pronouncements
On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases, which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. The ASU will be effective for the Company beginning September 1, 2019, including interim periods in its fiscal year 2020, and allows for a modified retrospective method upon adoption. The Company is in the process of assessing the impact of this ASU on its Consolidated Financial Statements.
On January 5, 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The ASU will be effective for the Company beginning September 1, 2018, including interim periods in its fiscal year 2019. The Company does not expect the adoption of this ASU to have a material impact on its Consolidated Financial Statements.

8

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


On November 20, 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which amends existing guidance on income taxes to require the classification of all deferred tax assets and liabilities as non-current on the balance sheet. The ASU will be effective for the Company beginning September 1, 2017, including interim periods in its fiscal year 2018, and allows for both retrospective and prospective methods of transition upon adoption. The Company is in the process of determining whether to early adopt the standard, which is permitted, and assessing the impact of this ASU on its Consolidated Financial Statements.
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning September 1, 2018, including interim periods in its fiscal year 2019, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on its Consolidated Financial Statements.
2. EARNINGS PER SHARE
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended
 
Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
Basic Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
1,326,520

 
$
690,726

 
$
2,145,419

 
$
1,522,256

Basic weighted average Class A ordinary shares
626,523,793

 
628,254,759

 
626,505,960

 
628,338,365

Basic earnings per share
$
2.12

 
$
1.10

 
$
3.42

 
$
2.42

Diluted Earnings per share
 
 
 
 
 
 
 
Net income attributable to Accenture plc
$
1,326,520

 
$
690,726

 
$
2,145,419

 
$
1,522,256

Net income attributable to noncontrolling interests in Accenture Holdings plc and Accenture Canada Holdings Inc. (1)
63,379

 
41,053

 
102,955

 
91,689

Net income for diluted earnings per share calculation
$
1,389,899

 
$
731,779

 
$
2,248,374

 
$
1,613,945

Basic weighted average Class A ordinary shares
626,523,793

 
628,254,759

 
626,505,960

 
628,338,365

Class A ordinary shares issuable upon redemption/exchange of noncontrolling interests (1)
29,915,340

 
37,311,982

 
30,083,184

 
37,808,602

Diluted effect of employee compensation related to Class A ordinary shares
11,520,457

 
13,475,889

 
12,914,682

 
14,430,675

Diluted effect of share purchase plans related to Class A ordinary shares
165,497

 
122,507

 
254,764

 
175,314

Diluted weighted average Class A ordinary shares
668,125,087

 
679,165,137

 
669,758,590

 
680,752,956

Diluted earnings per share
$
2.08

 
$
1.08

 
$
3.36

 
$
2.37

_______________
(1)
Diluted earnings per share assumes the redemption of all Accenture Holdings plc ordinary shares owned by holders of noncontrolling interests and the exchange of all Accenture Canada Holdings Inc. exchangeable shares for Accenture plc Class A ordinary shares on a one-for-one basis. The income effect does not take into account “Net income attributable to noncontrolling interests — other,” since those shares are not redeemable or exchangeable for Accenture plc Class A ordinary shares.

9

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


3. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive loss attributable to Accenture plc:
 
Three Months Ended
 
Six Months Ended
 
February 29, 2016
 
February 28, 2015
 
February 29, 2016
 
February 28, 2015
Foreign currency translation
 
 
 
 
 
 
 
    Beginning balance
$
(967,883
)
 
$
(514,747
)
 
$
(853,504
)
 
$
(324,596
)
             Foreign currency translation
(29,210
)
 
(153,781
)
 
(142,673
)
 
(341,634
)
             Income tax benefit
2,865

 
1,623

 
1,493

 
3,191

             Portion attributable to noncontrolling interests
1,713

 
(691
)
 
2,169

 
(4,557
)
             Foreign currency translation, net of tax
(24,632
)
 
(152,849
)
 
(139,011
)
 
(343,000
)
    Ending balance
(992,515
)
 
(667,596
)
 
(992,515
)
 
(667,596
)
 
 
 
 
 
 
 
 
Defined benefit plans
 
 
 
 
 
 
 
    Beginning balance
(519,518
)
 
(527,301
)
 
(523,619
)
 
(531,143
)
             Reclassifications into net periodic pension and
post-retirement expense (1)
6,572

 
6,914

 
13,205

 
13,309

             Income tax expense
(2,858
)
 
(2,379
)
 
(5,194
)
 
(4,702
)
             Portion attributable to noncontrolling interests
(169
)
 
(248
)
 
(365
)
 
(478
)
             Defined benefit plans, net of tax
3,545

 
4,287

 
7,646

 
8,129

    Ending balance
(515,973
)
 
(523,014
)
 
(515,973
)
 
(523,014
)
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
    Beginning balance
(511
)
 
1,339

 
(33,288
)
 
(16,209
)
             Unrealized (losses) gains
(23,599
)
 
96,506

 
24,748

 
117,816

             Reclassification adjustments into Cost of services
2,529

 
(5,642
)
 
3,979

 
(4,722
)
             Income tax benefit (expense)
9,567

 
(31,192
)
 
(5,883
)
 
(34,821
)
             Portion attributable to noncontrolling interests
528

 
(3,291
)
 
(1,042
)
 
(4,344
)
             Cash flow hedges, net of tax
(10,975
)
 
56,381

 
21,802

 
73,929

    Ending balance (2)
(11,486
)
 
57,720

 
(11,486
)
 
57,720

 
 
 
 
 
 
 
 
Marketable securities
 
 
 
 
 
 
 
    Beginning balance
(1,561
)
 

 
(1,561
)
 

             Unrealized losses
(170
)
 

 
(170
)
 

             Income tax benefit
67

 

 
67

 

             Portion attributable to noncontrolling interests
5

 

 
5

 

             Marketable securities, net of tax
(98
)
 

 
(98
)
 

    Ending balance
(1,659
)
 

 
(1,659
)
 

 
 
 
 
 
 
 
 
Accumulated other comprehensive loss
$
(1,521,633
)
 
$
(1,132,890
)
 
$
(1,521,633
)
 
$
(1,132,890
)
_______________
(1)
Reclassifications into net periodic pension and post-retirement expense are recognized in Cost of services, Sales and marketing and General and administrative costs.
(2)
As of February 29, 2016, $2,351 of net unrealized gains related to derivatives designated as cash flow hedges is expected to be reclassified into Cost of services in the next 12 months.

10

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


4. BUSINESS COMBINATIONS AND DIVESTITURE
Business Combinations
On October 20, 2015, the Company acquired Cloud Sherpas (through its holding company Declarative Holdings, Inc.), a leader in cloud advisory and technology services for approximately $406,562, net of cash acquired. This acquisition enhances the Company’s ability to provide clients with cloud strategy and technology consulting, as well as cloud application implementation, integration and management services, and resulted in approximately 1,100 employees joining the Company. In connection with this acquisition, the Company recorded goodwill of $389,093, which was allocated to all five reportable operating segments, and intangible assets of $68,200, primarily related to customer-related intangibles. The goodwill is substantially non-deductible for U.S. federal income tax purposes. The intangible assets are being amortized over one to seven years. The pro forma effects of this acquisition on the Company’s operations were not material.
During the six months ended February 29, 2016, the Company completed other individually immaterial acquisitions for total consideration of $322,689, net of cash acquired. The pro forma effects of these acquisitions on the Company’s operations were not material.
Divestiture
On January 26, 2016, the Company completed the sale of Navitaire LLC (Navitaire), a wholly owned subsidiary of Accenture that provides technology and business solutions to the airline industry, to Amadeus IT Group, S.A. (Amadeus). Concurrent with the sale, the Company also entered into several arrangements to provide services to Amadeus, principally infrastructure outsourcing over the next five years. The Company received a total of $832,810, net of transaction costs and cash divested, of which $214,500 was recorded as deferred revenue attributable to arrangements to provide services to Amadeus. In connection with the sale of Navitaire, the Company recorded a gain of $553,577 (reported in “Gain on sale of business” in the Consolidated Income Statements) and recorded related income taxes of $58,278. Adjustments related to the completion of certain post-closing matters, including a true-up of divested working capital, may be recorded in subsequent periods. Approximately 600 Navitaire employees transferred to Amadeus as a part of this sale.

11

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


5. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying amount of goodwill by reportable operating segment were as follows:
 
August 31,
2015
 
Additions/
Adjustments
 
Foreign
Currency
Translation
 
February 29,
2016
Communications, Media & Technology
$
364,824

 
$
148,583

 
$
(10,810
)
 
$
502,597

Financial Services
713,430

 
158,633

 
(11,433
)
 
860,630

Health & Public Service
588,893

 
129,991

 
(2,428
)
 
716,456

Products
1,001,768

 
71,391

 
(20,895
)
 
1,052,264

Resources
260,918

 
116,669

 
(8,115
)
 
369,472

Total
$
2,929,833

 
$
625,267

 
$
(53,681
)
 
$
3,501,419

Goodwill includes immaterial adjustments related to prior period acquisitions.
Intangible Assets
The Company’s definite-lived intangible assets by major asset class were as follows:
 
 
February 29, 2016
 
August 31, 2015
Intangible Asset Class
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Customer-related
 
$
529,285

 
$
(141,719
)
 
$
387,566

 
$
449,219

 
$
(120,841
)
 
$
328,378

Technology
 
115,491

 
(55,320
)
 
60,171

 
104,824

 
(44,988
)
 
59,836

Patents
 
117,669

 
(56,854
)
 
60,815

 
114,979

 
(54,064
)
 
60,915

Other
 
37,755

 
(14,492
)
 
23,263

 
31,480

 
(15,702
)
 
15,778

Total
 
$
800,200

 
$
(268,385
)
 
$
531,815

 
$
700,502

 
$
(235,595
)
 
$
464,907

Total amortization related to the Company’s intangible assets was $29,640 and $57,364 for the three and six months ended February 29, 2016, respectively. Total amortization related to the Company’s intangible assets was $19,856 and $47,578 for the three and six months ended February 28, 2015, respectively. Estimated future amortization related to intangible assets held as of February 29, 2016 is as follows:
Fiscal Year
 
Estimated Amortization
Remainder of 2016
 
$
59,134

2017
 
102,030

2018
 
85,971

2019
 
66,779

2020
 
62,482

Thereafter
 
155,419

Total
 
$
531,815


12

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


6. MATERIAL TRANSACTIONS AFFECTING SHAREHOLDERS’ EQUITY
Dividends
The Company’s dividend activity during the six months ended February 29, 2016 was as follows:
 
 
Dividend Per
Share
 
Accenture plc Class A
Ordinary Shares
 
Accenture Holdings plc Ordinary
Shares and Accenture Canada Holdings
Inc. Exchangeable Shares
 
Total Cash
Outlay
Dividend Payment Date
 
 
Record Date
 
Cash Outlay
 
Record Date
 
Cash Outlay
 
November 13, 2015
 
$
1.10

 
October 16, 2015
 
$
687,285

 
October 13, 2015
 
$
33,391

 
$
720,676

The payment of the cash dividends also resulted in the issuance of an immaterial number of additional restricted share units to holders of restricted share units.
Subsequent Event
On March 23, 2016, the Board of Directors of Accenture plc declared a semi-annual cash dividend of $1.10 per share on its Class A ordinary shares for shareholders of record at the close of business on April 15, 2016. On March 23, 2016, the Board of Directors of Accenture Holdings plc declared a semi-annual cash dividend of $1.10 per share on its ordinary shares for shareholders of record at the close of business on April 12, 2016. Both dividends are payable on May 13, 2016. The payment of the cash dividends will result in the issuance of an immaterial number of additional restricted share units to holders of restricted share units.

13

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


7. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risk. The Company’s derivative financial instruments consist of deliverable and non-deliverable foreign currency forward contracts.
Cash Flow Hedges
For a cash flow hedge, the effective portion of the change in estimated fair value of a hedging instrument is recorded in Accumulated other comprehensive loss as a separate component of Shareholders’ Equity and is reclassified into Cost of services in the Consolidated Income Statements during the period in which the hedged transaction is recognized. For information related to derivatives designated as cash flow hedges that were reclassified into Cost of services during the three and six months ended February 29, 2016 and February 28, 2015, as well as those expected to be reclassified into Cost of services in the next 12 months, see Note 3 (Accumulated Other Comprehensive Loss) to these Consolidated Financial Statements.
Other Derivatives
Realized gains or losses and changes in the estimated fair value of foreign currency forward contracts that have not been designated as hedges were a net gain of $15,578 and a net loss of $57,399 for the three and six months ended February 29, 2016, respectively, and a net loss of $67,060 and $172,590 for the three and six months ended February 28, 2015, respectively. Gains and losses on these contracts are recorded in Other expense, net in the Consolidated Income Statements and are offset by gains and losses on the related hedged items.
Fair Value of Derivative Instruments
The notional and fair values of all derivative instruments were as follows:
 
February 29, 2016
 
August 31, 2015
Assets
 
 
 
Cash Flow Hedges
 
 
 
Other current assets
$
41,110

 
$
28,282

Other non-current assets
12,935

 
13,503

Other Derivatives
 
 
 
Other current assets
19,531

 
18,233

Total assets
$
73,576

 
$
60,018

Liabilities
 
 
 
Cash Flow Hedges
 
 
 
Other accrued liabilities
$
38,759

 
$
48,683

Other non-current liabilities
43,428

 
48,746

Other Derivatives
 
 
 
Other accrued liabilities
32,569

 
31,862

Total liabilities
$
114,756

 
$
129,291

Total fair value
$
(41,180
)
 
$
(69,273
)
Total notional value
$
6,721,272

 
$
6,363,110


14

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


The Company utilizes standard counterparty master agreements containing provisions for the netting of certain foreign currency transaction obligations and for the set-off of certain obligations in the event of an insolvency of one of the parties to the transaction. In the Consolidated Balance Sheets, the Company records derivative assets and liabilities at gross fair value. The potential effect of netting derivative assets against liabilities under the counterparty master agreements was as follows:
 
February 29,
2016
 
August 31,
2015
Net derivative assets
$
63,259

 
$
36,661

Net derivative liabilities
104,439

 
105,934

Total fair value
$
(41,180
)
 
$
(69,273
)
8. RETIREMENT AND PROFIT SHARING PLANS
Subsequent Event
On March 18, 2016, Accenture plc’s Board of Directors approved an amendment to terminate the Company’s U.S. pension plan, effective May 30, 2016, for all active and former employees who are no longer accruing benefits in the pension plan (approximately 16,200 people). The amendment also provides for the creation of a separate defined benefit plan with substantially the same terms for approximately 600 active employees who are currently eligible to accrue benefits. The U.S. pension plan is expected to be settled in 12 to 18 months, subject to receipt of customary regulatory approvals.
The Company’s ultimate settlement obligation will depend upon both the nature and timing of participant settlements and prevailing market conditions. Upon settlement, the Company expects to recognize additional expense, consisting of unrecognized actuarial losses included in Accumulated other comprehensive loss that totaled approximately $337,000 as of August 31, 2015, adjusted for the difference between the ultimate settlement obligation and the Company’s accrued pension obligation. The Company does not expect the settlement of the U.S. pension plan obligations to have a material impact on its cash position.
9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the right to purchase or may also be required to purchase substantially all of the remaining outstanding shares of its Avanade Inc. subsidiary (“Avanade”) not owned by the Company at fair value if certain events occur. As of February 29, 2016 and August 31, 2015, the Company has reflected the fair value of $65,420 and $79,023, respectively, related to Avanade’s redeemable common stock and the intrinsic value of the options on redeemable common stock in Other accrued liabilities in the Consolidated Balance Sheets.
Indemnifications and Guarantees
In the normal course of business and in conjunction with certain client engagements, the Company has entered into contractual arrangements through which it may be obligated to indemnify clients with respect to certain matters.
As of February 29, 2016 and August 31, 2015, the Company’s aggregate potential liability to its clients for expressly limited guarantees involving the performance of third parties was approximately $634,000 and $655,000, respectively, of which all but approximately $73,000 and $43,000, respectively, may be recovered from the other third parties if the Company is obligated to make payments to the indemnified parties as a consequence of a performance default by the other third parties. For arrangements with unspecified limitations, the Company cannot reasonably estimate the aggregate maximum potential liability, as it is inherently difficult to predict the maximum potential amount of such payments, due to the conditional nature and unique facts of each particular arrangement.
To date, the Company has not been required to make any significant payment under any of the arrangements described above. The Company has assessed the current status of performance/payment risk related to arrangements with limited guarantees, warranty obligations, unspecified limitations and/or indemnification provisions and believes that any potential payments would be immaterial to the Consolidated Financial Statements, as a whole.

15

ACCENTURE PLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(In thousands of U.S. dollars, except share and per share amounts or as otherwise disclosed)
(Unaudited)


Legal Contingencies
As of February 29, 2016, the Company or its present personnel had been named as a defendant in various litigation matters. The Company and/or its personnel also from time to time are involved in investigations by various regulatory or legal authorities concerning matters arising in the course of its business around the world. Based on the present status of these matters, management believes the range of reasonably possible losses in addition to amounts accrued, net of insurance recoveries, will not have a material effect on the Company’s results of operations or financial condition.
10. SEGMENT REPORTING
The Company’s reportable operating segments are the five operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Information regarding the Company’s reportable operating segments is as follows:
 
Three Months Ended
 
February 29,
2016
 
February 28,
2015
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
1,606,700

 
$
242,512

 
$
1,516,785

 
$
201,661

Financial Services
1,684,729

 
230,534

 
1,589,535

 
228,161

Health & Public Service
1,482,264

 
209,795

 
1,319,917

 
163,830

Products
1,994,530

 
286,336

 
1,850,953

 
271,826

Resources
1,173,997

 
118,867

 
1,211,826

 
155,555

Other
3,345

 

 
4,313

 

Total
$
7,945,565

 
$
1,088,044

 
$
7,493,329

 
$
1,021,033


 
Six Months Ended
 
February 29,
2016
 
February 28,
2015
 
Net
Revenues
 
Operating
Income
 
Net
Revenues
 
Operating
Income
Communications, Media & Technology
$
3,211,339

 
$
490,385

 
$
3,097,822

 
$
390,418

Financial Services
3,429,945

 
553,319

 
3,305,762

 
525,743

Health & Public Service
2,906,131

 
382,373

 
2,688,359

 
365,633

Products
3,984,653

 
577,559

 
3,781,284

 
561,558

Resources
2,419,081

 
305,668

 
2,507,307

 
365,390

Other
7,579

 

 
8,510

 

Total
$
15,958,728

 
$
2,309,304

 
$
15,389,044

 
$
2,208,742



16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended August 31, 2015, and with the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2015.
We use the terms “Accenture,” “we,” the “Company,” “our” and “us” in this report to refer to Accenture plc and its subsidiaries. All references to years, unless otherwise noted, refer to our fiscal year, which ends on August 31. For example, a reference to “fiscal 2016” means the 12-month period that will end on August 31, 2016. All references to quarters, unless otherwise noted, refer to the quarters of our fiscal year.
We use the term “in local currency” so that certain financial results may be viewed without the impact of foreign currency exchange rate fluctuations, thereby facilitating period-to-period comparisons of business performance. Financial results “in local currency” are calculated by restating current period activity into U.S. dollars using the comparable prior year period’s foreign currency exchange rates. This approach is used for all results where the functional currency is not the U.S. dollar.
Disclosure Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) relating to our operations, results of operations and other matters that are based on our current expectations, estimates, assumptions and projections. Words such as “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “positioned,” “outlook” and similar expressions are used to identify these forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in these forward-looking statements. Risks, uncertainties and other factors that might cause such differences, some of which could be material, include, but are not limited to:
Our results of operations could be adversely affected by volatile, negative or uncertain economic conditions and the effects of these conditions on our clients’ businesses and levels of business activity.
Our business depends on generating and maintaining ongoing, profitable client demand for our services and solutions, and a significant reduction in such demand could materially affect our results of operations.
If we are unable to keep our supply of skills and resources in balance with client demand around the world and attract and retain professionals with strong leadership skills, our business, the utilization rate of our professionals and our results of operations may be materially adversely affected.
The markets in which we compete are highly competitive, and we might not be able to compete effectively.
We could have liability or our reputation could be damaged if we fail to protect client and/or Accenture data or information systems as obligated by law or contract or if our information systems are breached.
Our results of operations and ability to grow could be materially negatively affected if we cannot adapt and expand our services and solutions in response to ongoing changes in technology and offerings by new entrants.
Our results of operations could materially suffer if we are not able to obtain sufficient pricing to enable us to meet our profitability expectations.
If we do not accurately anticipate the cost, risk and complexity of performing our work or if third parties upon whom we rely do not meet their commitments, then our contracts could have delivery inefficiencies and be less profitable than expected or unprofitable.
Our results of operations could be materially adversely affected by fluctuations in foreign currency exchange rates.
Our profitability could suffer if our cost-management strategies are unsuccessful, and we may not be able to improve our profitability through improvements to cost-management to the degree we have done in the past.
Our business could be materially adversely affected if we incur legal liability.
Our work with government clients exposes us to additional risks inherent in the government contracting environment.

17


We might not be successful at identifying, acquiring or integrating businesses, entering into joint ventures or divesting businesses.
Our Global Delivery Network is increasingly concentrated in India and the Philippines, which may expose us to operational risks.
Changes in our level of taxes, as well as audits, investigations and tax proceedings, or changes in our treatment as an Irish company, could have a material adverse effect on our results of operations and financial condition.
As a result of our geographically diverse operations and our growth strategy to continue geographic expansion, we are more susceptible to certain risks.
Adverse changes to our relationships with key alliance partners or in the business of our key alliance partners could adversely affect our results of operations.
Our services or solutions could infringe upon the intellectual property rights of others or we might lose our ability to utilize the intellectual property of others.
If we are unable to protect our intellectual property rights from unauthorized use or infringement by third parties, our business could be adversely affected.
Our ability to attract and retain business and employees may depend on our reputation in the marketplace.
If we are unable to manage the organizational challenges associated with our size, we might be unable to achieve our business objectives.
We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could adversely affect our financial results.
Many of our contracts include payments that link some of our fees to the attainment of performance or business targets and/or require us to meet specific service levels. This could increase the variability of our revenues and impact our margins.
If we are unable to collect our receivables or unbilled services, our results of operations, financial condition and cash flows could be adversely affected.
Our results of operations and share price could be adversely affected if we are unable to maintain effective internal controls.
We are incorporated in Ireland and a significant portion of our assets are located outside the United States. As a result, it might not be possible for shareholders to enforce civil liability provisions of the federal or state securities laws of the United States. We may also be subject to criticism and negative publicity related to our incorporation in Ireland.
Irish law differs from the laws in effect in the United States and might afford less protection to shareholders.
We might be unable to access additional capital on favorable terms or at all. If we raise equity capital, it may dilute our shareholders’ ownership interest in us.
For a more detailed discussion of these factors, see the information under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2015. Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to update any forward-looking statements.

18


Overview
Revenues are driven by the ability of our executives to secure new contracts and to deliver services and solutions that add value relevant to our clients’ current needs and challenges. The level of revenues we achieve is based on our ability to deliver market-leading service offerings and to deploy skilled teams of professionals quickly and on a global basis.
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. There continues to be significant volatility and economic and geopolitical uncertainty in certain markets around the world, which may impact our business. We continue to monitor the impact of this volatility and uncertainty and seek to manage our costs in order to respond to changing conditions. There continues to be significant volatility in foreign currency exchange rates. The majority of our net revenues are denominated in currencies other than the U.S. dollar, including the Euro and the U.K. pound. Unfavorable fluctuations in foreign currency exchange rates have had and we expect will continue to have a material effect on our financial results.
Revenues before reimbursements (“net revenues”) for the second quarter of fiscal 2016 increased 6% in U.S. dollars and 12% in local currency compared to the second quarter of fiscal 2015. Net revenues for the six months ended February 29, 2016 increased 4% in U.S. dollars and 11% in local currency compared to the six months ended February 28, 2015. Demand for our services and solutions continued to be strong, resulting in growth across all areas of our business. All of our operating groups achieved quarterly year-over-year revenue growth in local currency in the second quarter of fiscal 2016, with very strong growth in Health & Public Service, Products, Communications, Media & Technology and Financial Services, while Resources experienced modest growth. Revenue growth in local currency was significant in consulting and solid in outsourcing during the second quarter of fiscal 2016. While the business environment remained competitive, pricing was relatively stable and we saw improvement in certain areas of our business. We use the term “pricing” to mean the contract profitability or margin on the work that we sell.
In our consulting business, net revenues for the second quarter of fiscal 2016 increased 12% in U.S. dollars and 18% in local currency compared to the second quarter of fiscal 2015. Net consulting revenues for the six months ended February 29, 2016 increased 9% in U.S. dollars and 17% in local currency compared to the six months ended February 28, 2015. We continue to experience growing demand for digital-related services and assisting clients with the adoption of new technologies. In addition, clients continued to be focused on initiatives designed to deliver cost savings and operational efficiency, as well as projects to integrate their global operations and grow and transform their businesses. Compared to fiscal 2015, we continued to provide a greater proportion of systems integration consulting through use of lower-cost resources in our Global Delivery Network. This trend has resulted in work volume growing faster than revenue in our systems integration business, and we expect this trend to continue.
In our outsourcing business, net revenues for the second quarter of fiscal 2016 were flat in U.S. dollars and increased 6% in local currency compared to the second quarter of fiscal 2015. Net outsourcing revenues for the six months ended February 29, 2016 decreased 2% in U.S. dollars and increased 5% in local currency compared to the six months ended February 28, 2015. We are experiencing growing demand to assist clients with cloud enablement and the operation and maintenance of digital-related services. In addition, clients continue to be focused on transforming their operations to improve effectiveness and save costs. Compared to fiscal 2015, we continued to provide a greater proportion of application outsourcing through use of lower-cost resources in our Global Delivery Network.
As we are a global company, our revenues are denominated in multiple currencies and may be significantly affected by currency exchange rate fluctuations. If the U.S. dollar strengthens against other currencies, resulting in unfavorable currency translation, our revenues, revenue growth and results of operations in U.S. dollars may be lower. If the U.S. dollar weakens against other currencies, resulting in favorable currency translation, our revenues, revenue growth and results of operations in U.S. dollars may be higher. When compared to the same periods in fiscal 2015, the U.S. dollar strengthened significantly against many currencies during the three and six months ended February 29, 2016, resulting in unfavorable currency translation and U.S. dollar revenue growth that was approximately 6% and 7% lower, respectively, than our revenue growth in local currency. Assuming that exchange rates stay within recent ranges for the remainder of fiscal 2016, we estimate that our full fiscal 2016 revenue growth will be approximately 5% lower in U.S. dollars than in local currency.
The primary categories of operating expenses include cost of services, sales and marketing and general and administrative costs. Cost of services is primarily driven by the cost of client-service personnel, which consists mainly of compensation, subcontractor and other personnel costs, and non-payroll costs on outsourcing contracts. Cost of services includes a variety of activities such as: contract delivery; recruiting and training; software development; and integration of acquisitions. Sales and marketing costs are driven primarily by: compensation costs for business development activities; marketing- and advertising-related activities; and certain acquisition-related costs. General and administrative costs primarily include costs for non-client-facing personnel, information systems and office space.
Utilization for the second quarter of fiscal 2016 was 90%, flat with the first quarter of fiscal 2016, and down from 91% in the second quarter of fiscal 2015. This level of utilization reflects continued strong demand for resources in our Global Delivery Network and in most countries. We continue to hire to meet current and projected future demand. We proactively plan and manage

19


the size and composition of our workforce and take actions as needed to address changes in the anticipated demand for our services and solutions, given that compensation costs are the most significant portion of our operating expenses. Based on current and projected future demand, we have increased our headcount, the majority of which serve our clients, to approximately 373,000 as of February 29, 2016, compared to approximately 323,000 as of February 28, 2015. The year-over-year increase in our headcount reflects an overall increase in demand for our services and solutions, primarily those delivered through our Global Delivery Network, as well as headcount added in connection with acquisitions. Annualized attrition, excluding involuntary terminations, for the second quarter of fiscal 2016 was 13%, flat with the first quarter of fiscal 2016, and down from 14% in the second quarter of fiscal 2015. We evaluate voluntary attrition, adjust levels of new hiring and use involuntary terminations as means to keep our supply of skills and resources in balance with changes in client demand. In addition, we adjust compensation in certain skill sets and geographies in order to attract and retain appropriate numbers of qualified employees. For the majority of our personnel, compensation increases for fiscal 2016 became effective December 1, 2015. We strive to adjust pricing and/or the mix of resources to reduce the impact of compensation increases on our gross margin. Our ability to grow our revenues and maintain or increase our margin could be adversely affected if we are unable to: keep our supply of skills and resources in balance with changes in the types or amounts of services and solutions clients are demanding; recover increases in compensation; deploy our employees globally on a timely basis; manage attrition; and/or effectively assimilate and utilize new employees.
Gross margin (Net revenues less Cost of services before reimbursable expenses as a percentage of Net revenues) for the second quarter of fiscal 2016 was 29.8%, compared with 29.9% for the second quarter of fiscal 2015. Gross margin for the six months ended February 29, 2016 was 30.9%, compared with 31.1% for the six months ended February 28, 2015. The reduction in gross margin for the first half of fiscal 2016 was principally due to higher costs associated with acquisition activity and higher labor costs as a percentage of net revenues compared to the same period in fiscal 2015.
Sales and marketing and general and administrative costs as a percentage of net revenues were 16.1% for the second quarter of fiscal 2016 and 16.4% for the six months ended February 29, 2016, compared with 16.3% for the second quarter of fiscal 2015 and 16.7% for the six months ended February 28, 2015. We continuously monitor these costs and implement cost-management actions, as appropriate. For the six months ended February 29, 2016 compared to the six months ended February 28, 2015, sales and marketing costs as a percentage of net revenues decreased 40 basis points principally due to improved operational efficiency in our business development activities. General and administrative costs as a percentage of net revenues increased 10 basis points.
Operating margin (Operating income as a percentage of Net revenues) for the second quarter of fiscal 2016 was 13.7%, compared with 13.6% for the second quarter of fiscal 2015. Operating margin for the six months ended February 29, 2016 was 14.5%, compared with 14.4% for the six months ended February 28, 2015. Our Operating income and Earnings per share are affected by currency exchange-rate fluctuations on revenues and costs. Most of our costs are incurred in the same currency as the related net revenues. Where practical, we also seek to manage foreign currency exposure for costs not incurred in the same currency as the related net revenues, such as the cost of our Global Delivery Network, by using currency protection provisions in our customer contracts and through our hedging programs. We seek to manage our costs, taking into consideration the residual positive and negative effects of changes in foreign exchange rates on those costs.
During the second quarter of fiscal 2016, we recorded a $554 million pre-tax Gain on sale of business related to a divestiture of our Navitaire business. For additional information, see Note 4 (Business Combinations and Divestiture) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
The effective tax rates for the second quarter of fiscal 2016 and six months ended February 29, 2016 were 13.7% and 20.4%, respectively. Absent the gain on the Navitaire divestiture and related $58 million in taxes, our effective tax rates for the second quarter of fiscal 2016 and six months ended February 29, 2016 would have been 15.4% and 22.8%, respectively. For additional information see Note 1 (Basis of Presentation) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Diluted earnings per share were $2.08 for the second quarter of fiscal 2016, compared with $1.08 for the second quarter of fiscal 2015. Diluted earnings per share were $3.36 for the six months ended February 29, 2016, compared with $2.37 for the six months ended February 28, 2015. The Gain on sale of business, net of taxes, from the Navitaire divestiture recorded during the second quarter of fiscal 2016 increased diluted earnings per share by $0.74 in both the second quarter of fiscal 2016 and six months ended February 29, 2016. Excluding the impact of this gain, diluted earnings per share would have been $1.34 for the second quarter of fiscal 2016 and $2.62 for the six months ended February 29, 2016.
We have presented the effective tax rate and diluted earnings per share excluding the Gain on sale of business, net of taxes, from the Navitaire divestiture, as we believe doing so facilitates understanding as to both the impact of this gain and our operating performance in comparison to the prior period.
New Bookings
New bookings for the second quarter of fiscal 2016 were $9.55 billion, with consulting bookings of $5.01 billion and outsourcing bookings of $4.54 billion. New bookings for the six months ended February 29, 2016 were $17.29 billion, with consulting bookings of $9.43 billion and outsourcing bookings of $7.86 billion.

20


Results of Operations for the Three Months Ended February 29, 2016 Compared to the Three Months Ended February 28, 2015
Our five reportable operating segments are our operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Three Months Ended
 
Percent
Increase
(Decrease)
U.S. Dollars
 
Percent
Increase
Local
Currency
 
 Percent of Total Net Revenues
for the Three Months Ended
  
February 29,
2016
 
February 28,
2015
 
 
 
February 29,
2016
 
February 28,
2015
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
1,607

 
$
1,517

 
6
 %
 
13
%
 
20
%
 
20
%
Financial Services
1,685

 
1,590

 
6

 
13

 
21

 
21

Health & Public Service
1,482

 
1,320

 
12

 
15

 
19

 
18

Products
1,995

 
1,851

 
8

 
14

 
25

 
25

Resources
1,174

 
1,212

 
(3
)
 
4

 
15

 
16

Other
3

 
4

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
7,946

 
7,493

 
6
 %
 
12
%
 
100
%
 
100
%
Reimbursements
451

 
438

 
3

 
 
 
 
 
 
TOTAL REVENUES
$
8,397

 
$
7,932

 
6
 %
 
 
 
 
 
 
GEOGRAPHIC REGIONS
 
 
 
 
 
 
 
 
 
 
 
North America
$
3,791

 
$
3,412

 
11
 %
 
12
%
 
48
%
 
46
%
Europe
2,785

 
2,660

 
5

 
14

 
35

 
35

Growth Markets
1,370

 
1,422

 
(4
)
 
10

 
17

 
19

TOTAL NET REVENUES
$
7,946

 
$
7,493

 
6
 %
 
12
%
 
100
%
 
100
%
TYPE OF WORK
 
 
 
 
 
 
 
 
 
 
 
Consulting
$
4,293

 
$
3,839

 
12
 %
 
18
%
 
54
%
 
51
%
Outsourcing
3,653

 
3,654

 

 
6

 
46

 
49

TOTAL NET REVENUES
$
7,946

 
$
7,493

 
6
 %
 
12
%
 
100
%
 
100
%
_______________ 
n/m = not meaningful
Amounts in table may not total due to rounding.
Net Revenues
The following net revenues commentary discusses local currency net revenue changes for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015:
Operating Groups
Communications, Media & Technology net revenues increased 13% in local currency. Consulting revenues reflected very significant growth, driven by growth across all industry groups and geographic regions, led by Electronics & High Tech and Communications in North America. Outsourcing revenues reflected strong growth, driven by Media & Entertainment and Electronics & High Tech in North America, partially offset by a decline in Communications in North America.
Financial Services net revenues increased 13% in local currency. Consulting revenues reflected very significant growth in both industry groups and in all geographic regions, led by Banking & Capital Markets in Europe and Insurance in North America. Outsourcing revenues reflected modest growth, driven by both industry groups in Growth Markets and Banking & Capital Markets in North America, partially offset by a decline in Insurance in North America.
Health & Public Service net revenues increased 15% in local currency. Consulting revenues reflected significant growth, driven by both industry groups in North America and Health in Growth Markets. Outsourcing revenues reflected very strong growth, led by Public Service and Health in North America.

21


Products net revenues increased 14% in local currency. Consulting revenues reflected very significant growth, driven by growth across all industry groups and geographic regions, led by Consumer Goods, Retail & Travel Services, as well as Industrial in Europe and Life Sciences in North America. Outsourcing revenues reflected modest growth, driven by Industrial and Life Sciences in Europe, partially offset by declines in Consumer Goods, Retail & Travel Services in Europe and Industrial in North America.
Resources net revenues increased 4% in local currency. Consulting revenue growth was driven by Utilities across all geographic regions and Chemicals & Natural Resources in Europe. These increases were partially offset by declines in Chemicals & Natural Resources in North America and Growth Markets and Energy in Europe and Growth Markets. Outsourcing revenues reflected modest growth, driven by Chemicals & Natural Resources and Utilities in Growth Markets.
Geographic Regions
North America net revenues increased 12% in local currency, driven by the United States.
Europe net revenues increased 14% in local currency, driven by the United Kingdom, Italy, Spain, Switzerland, Germany and France.
Growth Markets net revenues increased 10% in local currency, led by Japan.
Operating Expenses
Operating expenses for the second quarter of fiscal 2016 increased $398 million, or 6%, over the second quarter of fiscal 2015, and decreased as a percentage of revenues to 87.0% from 87.1% during this period. Operating expenses before reimbursable expenses for the second quarter of fiscal 2016 increased $385 million, or 6%, over the second quarter of fiscal 2015, and decreased as a percentage of net revenues to 86.3% from 86.4% during this period.
Cost of Services
Cost of services for the second quarter of fiscal 2016 increased $336 million, or 6%, over the second quarter of fiscal 2015, and remained flat as a percentage of revenues at 71.8% during this period. Cost of services before reimbursable expenses for the second quarter of fiscal 2016 increased $323 million, or 6%, over the second quarter of fiscal 2015, and increased as a percentage of net revenues to 70.2% from 70.1% during this period. Gross margin for the second quarter of fiscal 2016 decreased to 29.8% from 29.9% during this period. The reduction in gross margin for the second quarter of fiscal 2016 was principally due to higher costs associated with acquisition activity and higher labor costs as a percentage of net revenues, partially offset by lower non-payroll costs as a percentage of net revenues compared to the second quarter of fiscal 2015.
Sales and Marketing
Sales and marketing expense for the second quarter of fiscal 2016 increased $32 million, or 4%, over the second quarter of fiscal 2015, and decreased as a percentage of net revenues to 10.5% from 10.7% during this period.
General and Administrative Costs
General and administrative costs for the second quarter of fiscal 2016 increased $30 million, or 7%, over the second quarter of fiscal 2015, and increased as a percentage of net revenues to 5.7% from 5.6% during this period.
Operating Income and Operating Margin
Operating income for the second quarter of fiscal 2016 increased $67 million, or 7%, over the second quarter of fiscal 2015. Operating income and operating margin for each of the operating groups were as follows:
 
Three Months Ended
 
 
  
February 29,
2016
 
February 28,
2015
 
 
  
Operating
Income
 
Operating
Margin
 
Operating
Income
 
Operating
Margin
 
Increase
(Decrease)
 
 (in millions of U.S. dollars)
Communications, Media & Technology
$
243

 
15
%
 
$
202

 
13
%
 
$
41

Financial Services
231

 
14

 
228

 
14

 
2

Health & Public Service
210

 
14

 
164

 
12

 
46

Products
286

 
14

 
272

 
15

 
15

Resources
119

 
10

 
156

 
13

 
(37
)
Total
$
1,088

 
13.7
%
 
$
1,021

 
13.6
%
 
$
67

_______________ 
Amounts in table may not total due to rounding.

22


We estimate that the aggregate percentage impact of foreign currency exchange rates on our Operating income during the second quarter of fiscal 2016 was similar to that disclosed for Net revenue. In addition, during the second quarter of fiscal 2016, each operating group experienced higher costs associated with acquisition activity. The commentary below provides insight into other factors affecting operating group performance and operating margin for the second quarter of fiscal 2016 compared with the second quarter of fiscal 2015:
Communications, Media & Technology operating income increased primarily due to higher contract profitability and consulting revenue growth.
Financial Services operating income was flat year-over-year as consulting revenue growth was partially offset by higher sales and marketing costs as a percentage of net revenues.
Health & Public Service operating income increased due to revenue growth, higher contract profitability and lower sales and marketing costs as a percentage of net revenues.
Products operating income increased due to consulting revenue growth.
Resources operating income decreased primarily due to lower outsourcing contract profitability.
Gain on Sale of Business
We recorded a gain from the Navitaire divestiture of $554 million during the second quarter of fiscal 2016. For additional information, refer to Note 4 (Business Combinations and Divestiture) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Provision for Income Taxes
The effective tax rate for the second quarter of fiscal 2016 was 13.7%, compared with 26.0% for the second quarter of fiscal 2015. Absent the gain on the Navitaire divestiture and related $58 million in taxes , the effective tax rate for the second quarter of fiscal 2016 would have been 15.4%. The effective tax rate for the second quarter of fiscal 2016 benefited from a final determination of U.S. Federal taxes for fiscal 2012 as well as changes in the geographic distribution of earnings. The effective tax rate for the second quarter of fiscal 2015 benefited from a final determination of U.S.Federal taxes for fiscal years 2010 and 2011. This was offset by expenses associated with an increase in deferred tax liabilities during the second quarter of fiscal 2015, when the Company concluded that certain undistributed earnings of its U.S. subsidiaries would no longer be considered permanently reinvested. For more information, see Note 1 (Basis of Presentation) to our Consolidated Financial Statements under Item 1, “Financial Statements.”
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the second quarter of fiscal 2016 increased $21 million, or 40%, over the second quarter of fiscal 2015. The increase was due to higher Net income of $657 million, primarily driven by the Gain on sale of business from the Navitaire divestiture during the second quarter of fiscal 2016.
Earnings Per Share
Diluted earnings per share were $2.08 for the second quarter of fiscal 2016, compared with $1.08 for the second quarter of fiscal 2015. The $1.00 increase in our diluted earnings per share included the impact of the Gain on sale of business, net of taxes, from the Navitaire divestiture, which increased diluted earnings per share for the second quarter of fiscal 2016 by $0.74. Excluding the impact of this gain, diluted earnings per share for the second quarter of fiscal 2016 increased $0.26 compared with the second quarter of fiscal 2015, due to increases of $0.17 from a lower effective tax rate, $0.07 from higher revenues and operating results and $0.02 from lower weighted average shares outstanding. For information regarding our earnings per share calculations, see Note 2 (Earnings Per Share) to our Consolidated Financial Statements under Item 1, “Financial Statements.”

23


Results of Operations for the Six Months Ended February 29, 2016 Compared to the Six Months Ended February 28, 2015
Our five reportable operating segments are our operating groups, which are Communications, Media & Technology; Financial Services; Health & Public Service; Products; and Resources. Net revenues (by operating group, geographic region and type of work) and reimbursements were as follows:
  
Six Months Ended
 
Percent
Increase(Decrease)
U.S. Dollars
 
Percent
Increase
Local
Currency
 
Percent of Total Net Revenues
for the Six Months Ended
  
February 29,
2016
 
February 28,
2015
 
 
 
February 29,
2016
 
February 28,
2015
 
(in millions of U.S. dollars)
 
 
 
 
 
 
 
 
OPERATING GROUPS
 
 
 
 
 
 
 
 
 
 
 
Communications, Media & Technology
$
3,211

 
$
3,098

 
4
 %
 
13
%
 
20
%
 
20
%
Financial Services
3,430

 
3,306

 
4

 
13

 
22

 
22

Health & Public Service
2,906

 
2,688

 
8

 
12

 
18

 
17

Products
3,985

 
3,781

 
5

 
13

 
25

 
25

Resources
2,419

 
2,507

 
(4
)
 
5

 
15

 
16

Other
8

 
9

 
n/m

 
n/m

 

 

TOTAL NET REVENUES
15,959

 
15,389

 
4
 %
 
11
%
 
100
%
 
100
%
Reimbursements
904

 
886

 
2

 
 
 
 
 
 
TOTAL REVENUES
$
16,863

 
$
16,275

 
4
 %
 
 
 
 
 
 
GEOGRAPHIC REGIONS
 
 
 
 
 
 
 
 
 
 
 
North America
$
7,554

 
$
6,850

 
10
 %
 
11
%
 
47
%
 
45
%
Europe
5,669

 
5,565

 
2

 
13

 
36

 
36

Growth Markets
2,735

 
2,974

 
(8
)
 
8

 
17

 
19

TOTAL NET REVENUES
$
15,959

 
$
15,389